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A maximum wage, also often called a wage ceiling, is a state enforced limit on how much income an individual can earn. This is a related economic concept that is complementary to the minimum wage used currently by some states to enforce minimum earnings. Both a maximum and minimum wage are methods by which wealth can be redistributed within a society.

Advocates argue that a maximum wage could limit the possibility for inflation of a currency or economy, similar to the way a minimum wage may limit deflation. If these hypotheses are true, implementing both pieces of legislation would achieve an economy with wages that cannot inflate or deflate past the point of the relative maximum/minimum wage (respectively). Accordingly, wages in the economy would hover between the maximum and minimum, and the populace would live between the two wage points. Supporters say a maximum wage could also reduce devaluation of a currency by limiting the amount any member of the populace can earn, and consequently effectively limiting the availability of currency. Economists of the dominant monetarism view hold that this position is false; instead monetarists believe that inflation is controlled by growth in the money supply according to the quantity theory of money, rather than through growth in actual wages.

Contents

Implementation

No major economy has a direct earnings limit, though some economies do have highly progressive tax structures in the form of scaled taxation.

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Maximum liquid wealth

A maximum liquid wealth policy restricts the amount of liquid wealth an individual is permitted to maintain, while giving them unrestricted access to non-liquid assets. That is to say, an individual may earn as much as they like during a given time period, but all earnings must be re-invested (spent) within an equivalent time period; all earnings not re-invested within this time period would be seized.

This policy is only arguably a valid maximum wage implementation, as it does not actually restrict the wages a person is allowed to maintain, but only restricts the amount of actual currency they are allowed to hold at any given time. Proponents of the policy argue that it enforces the ideals of a maximum wage without restricting actual capital growth or economic incentive.

Proponents believe wealth that is not re-invested in the economy is harmful to economic growth; that actual liquid currency not re-invested timely is indicative of an unfair trade, in which an individual has paid more for a good/service than the good/service was worth. This stems from the belief that currency should represent the actual value of a good or service.

When this policy is imposed, individual savings can only be held as solid assets like stocks, bonds, business, and property. Opponents argue that since a maximum liquid wealth policy makes no allowance for individual savings, it therefore assumes the non-importance of a bank and the loans that banks provide. Loans being essential to the economy, opponents argue, banks are an essential economic institution. Proponents of the maximum liquid wealth policy respond that government could be directly responsible for supplying loans to individuals; they also add that such an arrangement could result in vastly lower interest rates. Of course, proponents of a conservative (small) government would not find this situation ideal.

Relative earnings limit

A relative earnings limit is a limit imposed upon a business, to the amount of compensation an individual is allowed, as a specific multiple of a company's lowest earner; or directly relative to the number of individuals a company employs and the average compensation provided to each individual employee, not including a certain percentage of the company's top earners. The former implementation has the advantage of limiting wage gaps. The latter implementation has the advantage of encouraging employment opportunities, as increasing employment would be a way for employers to boost their maximum earnings. A compromise would be to base the limit upon the number of employees had by a specific company and the compensation of that company's lowest earner. One weakness in this method is that a compan can simply hire outside firms to keep the low wage employees on their payroll, while only having the top earning employees on the companies payroll, effectively by-passing the limits.

To moderate self-employeed individuals, the maximum would be based on the average compensation of the nation's employed (GDP Per Capita) and a specific multiplier.

Direct earnings limit

A direct earnings limit is a limit placed directly, usually as a number in terms of currency, upon the amount of compensation any individual is allowed to earn in a given time period.

Scaled taxation

Scaled taxation is a method of progressive taxation that raises the rate at which the principal sum is taxed, directly relative to the amount of the principal. This type of taxation is normally applied to income taxes, although other types of taxation can be scaled.

In the case of a maximum wage, a scaled tax would be applied so that the top earners in a society would be taxed extremely large percentages of their income. Modern income tax systems, allowing salary raises to be reflected by a raise in after tax income, tax each individual note of currency in each particular bracket at the same rate.[1] An example follows.

Calculations are made for the top of each bracket

Currency Bracket:

Dollars Taxed in Bracket:

Rate:

Taxes From Bracket:

After Tax Income:

Percentage of Income Kept:

$1 – $40,000

$40,000

15%

$6,000

$34,000

85%

$40,000 - $100,000

$60,000

35%

$21,000

$34,000 + $39,000 = $73,000

73%

$100,000 - $175,000

$75,000

50%

$37,500

$73,000 + $37,500 = $110,500

63%

$175, 000 - $250,000

$75,000

60%

$45,000

$110,500 + $30,000 = $140,500

56%

$250,000 - $500,000

$250,000

75%

$187,500

$140,500 + $62,000 = $203,000

40.6%

$500,000+

$1+

90%

$0.90+

More than $203,000

Less than 40.6%

Criticism of maximum wages

Critics of a maximum wage such as Milton Friedman argue that such a policy would reduce incentive to innovate and for highly skilled workers to pursue demanding jobs. This decline in innovation would be problematic as innovation is one source of economic growth.

Austrian economists and Libertarianthink-tank from the Mackinac Center for Public Policy, argue that inflation is not caused by wages but by governments printing money. In addition, they highlight the fact money is a commodity whose value is subject to supply and demand. They argue likewise that the increased demand for labour brought about by a maximum wage will prevent an economy running at its most effective because people will try to circumvent a situation where wages are kept below free-market levels[2][3].

Furthermore, Austrian economists and others have argued that given the diverse preferences of individuals within society it would be impossible to determine at what level the maximum wage should be set or what 'sufficient wealth' is.

History

A maximum wage has been imposed by some social democratic governments such as Sweden in the 1960s. However, the policy was criticized and campaigners later had a "tax rebellion" and demanded the government reduce the top marginal taxes.[citation needed]

In his 2000 run for the Green Party presidential nomination, Jello Biafra called for a maximum wage of $100,000 in the United States, and the reduction of the income tax to zero for all income below that level. Biafra claimed he would increase taxes for the wealthy and reduce taxes for those in the lower and middle classes.[citation needed]

In England, the "Statute of Artificers of 1563" implemented statutes of compulsory labor and fixed maximum wage scales; Justices of the Peace could fix wages according "to the plenty or scarcity of the time".

To counteract the increase in prevailing wages due to scarcity of labor, American colonies in the 17th century created a ceiling wage and minimum hours of employment.[4]

Related concepts

Maximum Total Earnings legislation suggests that when a person has accumulated sufficient wealth that they can survive on the interest alone they must stop working and allow someone else to work. This theoretical concept assumes there is a set amount of work to be done in an economy, and is not supported by any major form of modern economic thought. Attempts to reduce unemployment by removing people from the labor force, as is proposed by this theory, have been a failure.[citation needed]